Lower paid employees often are hesitant to participate in a high deductible health plan (HDHP) due to the potential for large out-of-pocket payments.  To lessen these concerns, an employer may wish to make health savings account (HSA) contributions on behalf of those employees.  Unfortunately, such actions could violate the IRS "comparability rules" for employer HSA contributions.

Under the Internal Revenue Code, employer HSA contributions must be made on a comparable basis for all comparable participating employees. The IRS-approved categories of employees for comparability testing are:

  • current full-time employees,
  • current part-time employees and
  • former employees.

An employer may make larger contributions to the HSAs of all nonhighly compensated employees (NHCEs) than to the HSAs of highly compensated employees (HCEs).  For these purposes, an HCE is an employee making above the limit under section 414(q) of the Internal Revenue Code (generally, $115,000 in 2013).  Employers who violate the comparability rules face an excise tax of 35%.  The comparability rules generally do not apply to collectively bargained employees and contributions made through a cafeteria plan.

For example, providing a $250 HSA contribution solely to employees making under $50,000 would violate the comparability rules because employees making less than $50,000 is not an IRS-approved category of employees.  As an alternative, the employer could make a $250 HSA contribution to all full-time NHCEs participating in the high deductible program, and make no contribution for HCEs.  Another alternative would be to give each employee making less than $50,000 who is in an HDHP a cash bonus of $250, which the employee could choose to contribute to an HSA.  The employer could even allow that employee to contribute the $250 bonus to an HSA through a cafeteria plan (as long as the cafeteria plan allows HSA contributions).

Note that HSA contributions may be different for employees in self-only and family coverage. Also, HSA contributions made through a cafeteria plan are subject to the normal nondiscrimination testing rules applicable to cafeteria plans.

These comparability rules for employer HSA contributions are complicated and somewhat counterintuitive, with significant penalties for violations.  Employers wishing to make HSA contributions for some but not all employees should review these rules carefully with legal counsel.

For further information visit Waller's ERISA Exchange blog

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.